Venture capital funds offer a transparent and well-regulated platform with ease of investing in promising entrepreneurs and start-ups
It was in early 2001 that I joined Bharti Airtel to work with Sunil B. Mittal, a first generation entrepreneur. He opened my eyes to a completely new business of building ethos; he was open to diluting his stake. In other words, he was willing to share his future wealth with the people who shared his belief and risks in the early stages of his business. There were multiple risks in the business of that start-up, not least of which were the challenges of the regulator, the whimsical market forces, question of building scale, entry of internationally well-established competition, need for differentiation, the challenge of building a world-class team in an industry in its infancy, risk of technology obsolescence—the list was endless.
I was excited by the opportunity that presented itself. The excitement it presented completely overshadowed the daunting list of risks and, after a phase of uncertainty that every early stage venture provides, I experienced the upside of that risk—prosperity. And that whetted my appetite for many more such successes. I had fallen hopelessly in love with angel investing.
What is angel investing? Imagine coming across a Reliance, an Infosys, an Apple, or a Google a few decades ago when they were beginning to operationalise their ideas. At that moment, they were open to sharing equity with those who believed in their idea. Investing at this high-risk phase in people who you trust can make it happen is angel investing. Angel investors support the enterprise in an individual and encourage the ad-venture.
Often, investors ask me what is the right time for me to be angel investor. There exists a myth that only the wealthy can be angel investors. Warren Buffet became an investor at the age of 11, but still thinks he started late. Similarly, an entrepreneur, who may have a family to support, often possessing negligible savings and no foreseeable source of immediate income, starts a venture to pursue a dream. In other words, it requires neither a minimum age, nor minimum savings to start being an angel investor. It, however, needs conviction, patience, resilience, optimism and a never-say-die spirit.
What are the precautions in being an angel investor? The math of success is always tough but is no tougher in angel investing than it is in capital markets or sports, or science. Numbers indicate that more than half the ventures fail to succeed even marginally. But the reasons for failure are not far to see. Often, they are basic and fundamental. My first rule of success require the angel investor to monitor his direct investment in a start-up which means to be fully engaged with the founding team—as I was with the Zipdial team. In the start-up phase, the available talent in the team has to manage and grow the business in the face of continuous changes and challenges. The entrepreneurial team needs support from investors to surf through the many ups and downs. The second precaution is to co-invest, allowing the entrepreneur to have access to complimentary talent pool of investors.
In the 1990s, India saw the emergence of mutual funds. Till then, investors could only make direct investments in listed equities. They were neither open to bear the cost of management fees or profit share nor were they always well educated in this field. The trend has changed and now, there is a huge demand for professionally managed mutual funds offering systematic investment plans (SIPs). Twenty year later, a new opportunity has presented itself.
From 2010, the investors have the option of investing in alternate assets such as venture capital funds (VCFs) that is managed by professional fund managers called general partners (GPs). The investors in these funds are addressed as the limited partners (LPs) as they have liability limited to the capital committed by them and have a share in the gains as a partner. These locally managed funds offer a transparent and well-regulated platform with ease of investing in promising entrepreneurs and start-ups. The Indian government is helping build the ecosystem by offering a complete pass-through status to LPs, thereby income tax is applied as if the LP has made a direct investment in a start-up company.
In conclusion, timing is always by your side to be an angel investor in a promising team having a passion to build a vibrant new idea into a business venture. The ease of investing, transparency, periodic reporting offered by the well-regulated domestic venture funds is the best starting point for becoming an investor in Indian start-ups.
Sunil K. Goyal is founder and chief executive officer of YourNest Angel Fund.